In resuming its coverage of Apple, JMP Securities has issued a note warning of slower growth due to global economic factors and indicating that AT&T retail stores were quick to recommend RIM BlackBerry phones over the iPhone 3G, particularly for email.Little room for upside surprises
The firm assigned Apple a Market Perform rating, citing new product cycles for the iPhone 3G and new iPods released this week but also noting a deceleration in year over year growth and warning that margins "appear to be near peak levels."
In a summary that referenced the slow selling Lisa from the early 80s and the Newton from the mid 90s, JMP stated, "Our concern with AAPL stock is that we believe there is little room for upside surprises."
The note also reported, "For the last 11 quarters management has given forward revenue guidance, Wall Street’s consensus has always been above that guidance, and for the most part the company has reported slightly above that consensus estimate."
Retail store reports
The firm performed checks at 31 Apple, 8 Best Buy, and 11 AT&T retail stores. Apple retail employees reported a "a slowdown from the initial frenzy" in iPhone 3G sales, with only 10% of stores remaining sold out of inventory. Best Buy reported steady sales with normal inventory levels.
At eleven AT&T stores it visited, JMP found that employees were twice as likely to initially recommend a BlackBerry Curve or Pearl over the iPhone when asked to suggest a "phone to access the Internet and check email."
When asked specifically about email, employees would consistently suggest a BlackBerry first. When browsing the web was mentioned, AT&T stores would always recommend the iPhone first.
Year over year performance
While Apple has seen accelerating its year over year revenue growth in every quarter from the March 2007 quarter (21% growth) through March 2008 quarter (43%), JMP notes that the latest June quarter saw only 38% growth over the previous year ago quarter. The firm sees revenue growth slowing again in the September quarter, and is modeling for 31% growth over last year's record revenues.
JMP also warned that in terms of operating margins, Apple's year over year growth has fallen or remained flat, although margins over the last year have stayed in a tight range from 17.2% to 19.2%, excluding the December 2007 quarter, which saw 21.1% operating margins.
Product lineup
"Apple has done an exceptional job of gaining [Mac] market share over the last several years," JMP noted, although it continued by saying, "Given the deteriorating macroeconomic environment, we believe it is unlikely that Apple will be able to match the 2007 feat in 2008."
Among iPods, the report highlighted that Apple's year over year average sales growth over the last four quarters have slowed to "a leisurely 9%, well below the double-and triple-digit growth enjoyed a few years ago." The firm noted that high end iPod sales are being replaced by iPhones, "leaving a skew to lower-end shuffle and nano products."
JMP called the iPhone a "hit product" that caught Nokia, RIM, Motorola, Palm and Samsung "flat-footed," but noted competitors are working to make "notable changes in strategy to deal with the iPhone."
"Samsung and LG have started to roll out iPhone 'clones' with touch screens, like the Samsung Instinct and LG Dare. While we believe these phones are not as good as the iPhone, we believe they have caused pricing issues," the report stated.
Apple in the overall economy
JMP also warned that Apple's stock is looking expensive in comparison with other large-capitalization technology stocks, stating, "We note that Apple has been growing much faster than its comparable companies, though many have higher margins."
The firm also stated "Because Apple has invested heavily in its own chain of retail stores, an overall economic slowdown or slowing demand for the company's products will not only affect sales growth but also impact profit margins due to the fixed-cost nature of the retail stores."
It further warned "As iPods and other music sales become a greater percentage of sales, Apple may experience pressure on overall gross margins because those products carry a lower gross margin." In its own earning reports, Apple noted that rapidly growing sales in the iTunes Store were getting large enough to have a downward impact on the company's overall margins, as it runs the music store primarily to make content available to its users, rather than to claim huge profits.